The global energy crisis

by Kumar David

Well no, that’s not true, the energy price and supply crunch is not global; North America and Russia are for the time being riding fine. It’s Europe, especially the UK and Germany, East Asia, China and India that are suffering bellyache. It is a conjunction of worldwide trends plus decisions in particular countries or regions that have triggered the crunch, but there are global trends at work as well. Supply side or supply chain hiccups will be reflected in shortages and high prices but this time there is a coincidence of more factors than the Covid pandemic to be blamed. It is not easy to depict the whole picture in a single essay but let me push some ideas in this column as world leaders gather for the COPE26 summit in Glasgow at the end of the month. Let’s get started by repeating a few facts that readers are familiar with.

Oil at this moment is over $80 a barrel and pointing upwards; the Dutch gas spot-market, the standard in Europe, is ten-times higher now than it was in the middle of 2020. Germany and Northern Europe are faced with severe gas and electricity bottlenecks; petrol shortages in the UK have led to mile long queues and inversely short tempers. There are short, medium and underlying longer term complications. The immediate problem in Northern Europe is that not enough Russian gas is reaching it through the existing pipeline and the EU has still to certify the recently completed Nord Stream-2 pipeline from Russia to Germany via the Baltic Sea. A further complication is that European buyers contracted for natural gas on long-term contracts which obligation Russia is dutifully fulfilling, but Europe’s additional needs will have to be bought at spot-prices on spot-markets. There is no obligation for Russia to supply additional amounts at any but prevailing market prices; selling gas is not a charity. This bottle neck will span the winter and how much further no one knows because the winds are metaphorically becalmed and post-covid recovery has no use-by date attached to it.

In the graph I have reproduced from the Institute of Energy Economics, JKM is the Japan-Korea Marker, Dutch TTV is a European spot-market and Henry Hub is a giant gas selling point in the USA. The huge difference between the first two (over $20 per MMBtu) and the last (less than $5 per MMBtu) is liquefaction and transport costs. It is not possible to foresee where future prices will go but it is certain that price volatility will dominate markets. What blithering bad luck just when we are toying with LNG fired electricity! Unfortunately for Sri Lanka at this time when the country is setting off down the unavoidable LNG road, prices are all over the place. Nevertheless gas is the least dirty of the fossil fuel options. It is imperative that the CEB and the CPC train staff for their future buying departments because market complexities are challenging and the LNG road is unescapable. (MM on the graph’s y-axis means million).

The medium-term outlook for energy supply and prices is clouded by the worldwide decarbonisation drive. Germany and the UK for example, decommissioned or mothballed coal-fired plant. They were in no rush to build gas-fired generation as there was a headlong rush for renewables, mainly wind-power. But the wind bloweth as it listeth, or to be more prosaic, wind generated electricity can change by large amounts at short intervals. Large unexpected changes in electricity output in Germany caused power-swings throughout the Northern European grid and destabilised the whole system. The European love affair with wind-power has fizzled but investment in conventional (carbon emitting) power-plant has been long neglected. Germany and the UK are now caught by the short and curlies. France, annoyed with the UK about a fishing dispute, has threatened to punch the UK well below the belt at a place where it hurts and that is slicing off virile electricity supplies.

India allowed its coal stocks to run down and is now a victim of power shortages. The electricity supply sector is influenced by green-lobbies (bless them) and so India dutifully switched on large scale to solar and renewables and went slow on gas-fired plant construction and mothballed coal-fired projects. This is a general remark as I am not in a position to name the actual power stations concerned. China is different; electricity supply is Central or Provincial state owned and subject to direction. Instructions were issued to cut-back coal power and now many provinces are suffering power shortages. Some industries are cutting back activity and the icy cold hand of winter beckons the northern parts of the country.

The long-term challenge is that the world must learn how to interface decarbonisation, the turn to renewables and futuristic alternatives within the big energy picture. Soon after you read these lines world leaders will be scratching their heads about how to achieve zero-carbon targets and hold global temperature rise to within 1.5 degrees C of pre-industrialisation levels. Will they manage or will we all be cooked in this earthly pressure cooker? I say they will fail and I am supported by the International Energy Agency which said on October 13 that the world will fall short of its 2050 energy reduction target by 60%! Let me explain why I am a pessimist. If it was only about fuel for electricity generation then technology can do it with some hiccups as we are well on the way; by about 2050 the world will get fossil-fuel fired electricity generation down to acceptable levels.

But the point is fossil fired electricity generation is not the biggest problem; it is industry, transport and all the rest that modern life involves. Eighty percent of global gross energy use at this time is from fossil-fuel. The big carbon polluting industries are steel, cement, plastics and fertiliser. Supply chains today are long, stretch overseas and are opaque; inputs manufactured in country X enter final products of country Z, so it is difficult to pinpoint the sources and distribution of carbon. About 70% of carbon releases are concealed in the supply chain and in most countries electricity generation is not guilty of more than a fifth to a tenth of atmospheric carbon releases.

The more intractable problem in the capitalist world is that big business, all round, will howl in protest if hard emission control targets are enforced by governments. “What will be the effect on productivity, on profit margins and on business models if strict carbon accountability is forced on our activities?” big business will holler. Capitalism and strict enforcement of emission goals is incompatible. China, one of the worst polluters, is able to make headway because party edicts run; but America has no Federal Laws enforcing decarbonisation nor a carbon tax. Europe is stricter thanks to its social democratic traditions. But this makes competition between capitalists of different continents “unfair”. A global carbon tax is going to be hard to get agreement on.

The interruptibility – within-minutes and medium-time probabilistic (stochastic) characteristics of wind and solar power are affecting power system operations to an extent not originally foreseen. This is a complication over and above the unavailability of land and renewable resources for electricity on an adequate scale. Now when the shortage problem has become acute globally the neglect of even moderate investment in coal, oil and gas – fossil fuel fired plant in general – in recent decades is taking its toll. Investors have been reluctant to plough money into what appeared to be a dying industry. The pre-green-era abundance of fossil-powered electricity paradoxically sounded the death knell of coal. Even the current predicament of shortage is not attracting private investment in fossil-fired plant because it takes decades to recoup big investments and who knows which deadly Covid variant is mutating in someone’s genes awaiting a chance to send the global economy tumbling again. The tocsin beckoning the death of king-coal has sounded loud and clear so why invest, they say. Such are the conflicts that beset electricity supply in most parts of the world. There is no solution, only survival strategies.

Coal and oil energy as sources for electricity production are past tense nouns and wind in its present avatar is an unreliable bastard. The cost of solar-panels however is falling like the centre of gravity of a drunken sailor. But solar power’s favours are as fickle as a lady’s affection unless supplemented big time by storage technologies; pumped storage where you pump water uphill to a reservoir for future use, battery storage and hydrogen production. As solar-panel prices nosedive locations with large dessert landmasses are in luck. Next on the horizon is hydrogen which right now is a wearisome teenager – hard to compress or liquefy, it is combustible and flatulent. But like a teenager who grows up it will have its uses, first for heavy trucks and storage of stochastic green energy as hydrogen production, storage and transport will become cheaper than pumped-storage and batteries. Conventional (fission) nuclear is still a no-go option because of waste disposal. The Eldorado of an energy addicted world of course is fusion which has been, coming, coming, coming for so long. But when this frigid companion reaches commercial scale, perhaps later this century, it will be energy-for-free, or nearly so except capital outlays. The even better option is to halve the world’s population within two generations but the scope of that discourse lies beyond the remit of this essay.

In summary the global energy availability and pricing picture is grim in the short-term but less daunting in a ten to fifteen year perspective. The longer term looks good, but don’t forget the aphorisms of John Maynard Keynes who was rather obsessed with death.